This year, the Registered Retirement Savings Plan (RRSP) contribution
deadline for getting a 2018 tax deduction is March 1. You still have time to discuss the best
strategy with your financial advisor. Each year I’m asked how to get the
most benefit from an RRSP. I’ve distilled my advice into six key rules.

1. Contribute

Rule number 1: You can’t win if you don’t play. You can contribute 18% of
“earned income” to an RRSP every year to a pre-set maximum (subject to
pension adjustments and reversals). For 2018, the maximum contribution
limit is set at $26,230 (it rises to $26,500 for 2019 contributions).
Here’s the important thing: If you can’t contribute your maximum for the
year, contribute as much as you can.

It’s best from both a cash flow point of view and for investment growth to
make monthly contributions. The sooner you start tax-sheltered compounding
in your RRSP, the better. Start off with small amounts, gradually
increasing as your salary rises. Remember the magic of compounding. Even a
$500 monthly investment compounded monthly at a relatively conservative
rate of 6% will grow to $500,000 in 30 years.

You can also increase your contribution in a year by using “contribution
room” you’ve carried forward from previous years. You’ll find the amount of
your available contribution room on your 2018 Notice of Assessment from the
Canada Revenue Agency. Also, consider reinvesting any tax refund you get as
a result of your RRSP contribution. It’s found money. Use it to increase
your nest-egg to a million or more.

There are still many ways to split income and transfer credits between
family members. But one of the very best is the spousal RRSP. For this one,
you contribute to your spouse’s plan, and you get the tax deduction.
However, your spouse gets the benefit of the tax-sheltered compounded
growth in the RRSP. It’s a great way to get a tax break and keep it all in
the family, too.

3. Do not overcontribute!

RRSP contribution limits are very generous. And as I said earlier, most of
us don’t contribute to the maximum – ever. At times, though, you may find
yourself in a position to contribute a massive amount to your RRSP – say
you’ve come into a large inheritance or a large severance payment or won a
lottery prize (that’s very, very rare, but it does happen). If you plan to
contribute to extra funds into an RRSP, make sure you have enough
contribution room in the current year, including any contribution room
carried forward from previous years. If you overcontribute, you’re liable
for a stiff penalty tax of 1% per month up to 60 months on excess
contributions above $2,000. Plus, you have to file Form T1-OVP to report
your overcontribution. If you don’t, you’ll be liable for more penalties
and interest.

If you’re considering a large contribution, watch for Alternative Minimum
Tax. If AMT rears its ugly head, consider deferring some of the RRSP
deductions to a future year.

All in all, it’s vitally important to get your contribution right. Getting
the advice of a financial planner would be prudent at this point.

4. Know yourself and invest wisely

For many people, an RRSP will be their only source of retirement income
apart from the Canada Pension Plan. While RRSP-eligible investments include
everything from individual stocks to bonds to mutual funds and
exchange-traded funds, it’s not the place to speculate on junior mines or
high-tech start-ups. Moreover, tax benefits like the dividend tax credit,
the capital gains tax exemption, and the ability to offset losses against
gains are lost within an RRSP.

Aside from not contributing to an RRSP at all, the RRSP investment choice
is where most people go astray. Most of us tend to overestimate our
capacity to deal with market volatility and take investment losses. Be
realistic about your own tolerance for risk. Then allocate your RRSP assets
accordingly. Here’s a summary of qualified RRSP investments:

There are many other types of financial instruments that can be held by an
RRSP, including annuities, mortgages, and even investment grade gold and
silver bullion, coins, and certificates. Talk to your financial advisor to
see which investments best suit your needs.

5. You can’t “save” a million bucks

When considering RRSP-eligible investments, remember that you’ll never be
able to “save” a million dollars. The interest rates on so-called “savings”
accounts are laughably small, almost invisible in fact. So expand your
horizons, and look into various lower-risk, lower-cost investment funds,
such as conservative, index-tracking exchange-traded funds, if you’re a
more conservative investor.

6. Don’t break open the RRSP piggybank!

Your investments grow tax-free inside an RRSP. You don’t pay tax until you
withdraw funds at retirement, and then you pay tax on the withdrawals at
your full marginal rate, which is typically lower than it is in your peak
earning years. If you withdraw funds for an RRSP in your peak earning
years, you’ll pay tax at your top marginal rate and lose the benefit of all
that tax-sheltered compound growth. While it’s important to use the
tax-shelter benefits of an RRSP, it takes time, and that means you really
should use the RRSP as a retirement plan – not a source of funds for a
vacation or a new car.

The foregoing is for general information purposes only and is the opinion
of the writer. Securities mentioned are illustrative only and carry risk of
loss. No guarantee of investment performance is made or implied. It is not
intended to provide specific personalized advice including, without
limitation, investment, financial, legal, accounting or tax advice. Please
contact the author to discuss your particular circumstances.